THOUGHTS FROM A TECHNOLOGY CFO

Jun 18, 2014

Steve highlights how CFOs can harness flexible financing options from vendors for IT investment – rather than traditional cash acquisiton models – to help drive innovation.

Whether you‘re a multinational corporation, a medium-sized business or a Public Sector organisation, an efficient IT infrastructure is essential. Given the growing volumes of data, large distributed networks, increasingly stringent security and regulatory requirements and regular software upgrades, you can only stay ahead of the game if you consistently invest in new technology. Innovation cycles in IT are becoming shorter and shorter as employee demands of corporate IT keep in step with consumer technology innovation, and the question of how to fund and account for IT investment to drive maximum business value is a constant concern.

Companies need to maximise the return on investment in their IT infrastructure by seeking out flexible and transparent financial models for these investments. This is especially relevant in the current economic climate as organisations are being challenged to think differently about how assets are acquired and managed.

Steve O’Neill

An immediate effect of the financial crisis was that many companies cut IT investment dramatically. Many took the opportunity to really understand what their IT environment looked like, how well it delivered against the organisation’s objectives and how capable it was of driving the business forward to profitable growth. At the same time, customers have increasingly looked to vendors to provide alternative investment and procurement methods that may not have been considered in the past.

It is vital to take both a short term and long term view of the economics of any investment, bringing true asset management principles to the analysis of the ownership term. The traditional Capital Expenditure approach of ‘buying outright’ is increasingly being challenged as customers move to models that match cashflow to the delivered benefits. These models include simple lease solutions as well as other financial and operational arrangements such as ‘on demand’ consumption models or ‘pay as you use’. These models typically incorporate the added benefit of balance sheet management and even shared risk with the vendor.

The current economic environment supports low interest rates which sit well below the typical return on capital expectation of today’s enterprises. Forward thinking companies are therefore wisely reinvesting their cash to focus on core activities and making use of vendor finance solutions to facilitate the acquisition of IT. The significant benefit of many of these vendor specifc finance solutions is that they are fine tuned for the purchase of that vendors IT equipment and therefore create flexible, commercial and innovative purchasing vehicles that enable the equipment to be accounted for as capex or opex depending on the companys requirement or provide access to capital at lower costs than they would be be able to find themselves or at all.

Vendor lease solutions free up liquidity and have the added benefit of the rentals being fully tax-deductible, while cash acquisitions only allow for traditional tax-deductible depreciation. Off balance sheet vendor solutions can also leverage existing operating expense budgets which are often associated to extended maintenance, power/cooling and datacentre costs related to legacy infrastructure. Off balance sheet solutions can also help to improve capital ratios and ultimately enhance a company’s Basel II rating to drive down borrowing costs.

We are now in an era where the business case for any investment, based on a true understanding of a company’s commercial drivers and accounting methodologies, are as rigorously examined as any technical requirements. Businesses must drive down the cost of using technology and reduce the risk of technology obsolescence, whilst delivering innovation and business benefit. Gone are the days where an IT beauty parade wins the day: the business now decides on these investments based on a sound understanding of the total returns derived.

With a trend of reduced budgets in recent years, IT departments have seen systems being inherited, upgraded and refreshed with a lack of proper planning or understanding of the real total cost of ownership, or risk to the business this strategy creates. What results is a mishmash of technologies supporting the business which amplify maintenance budgets and constrain innovation and flexibility.

Business leaders need to understand that a flexible and innovative IT infrastructure is critical to maintaining competitive advantage for the core business. Cash acquisition methods lead to poor IT asset management and significant Net Book Value issues with legacy IT estates. CFOs looking for better thought out business cases which address all these issues need to consider alternative investment models, including vendor finance. Purchasing decision makers need a clear justification of the overall business drivers before authorising significant investments in IT that will help shape the future of their business.